The graphite race goes to a new level with Chinese-Australian merger

In what might be a roadmap for other graphite hopefuls, we are seeing the (probable*) birth of what is being claimed to the first vertically-integrated, stock exchange-listed, upstream flake graphite resource company (and coming complete with a production plant that makes spherical anodes and graphene). The deal involves the merging of companies that between them own three operating graphite mines in China and advanced flake graphite projects in Australia and South Korea.

Chinese graphite miner and manufacturer China Sciences Hengda Graphite Co will merge with Australian explorer Lamboo Resources (ASX: LMB). Incidentally, Lamboo’s biggest shareholder (with 18%) is the New York-based hedge fund, Och-Ziff. The $2 million deposit being paid by Lamboo to its proposed partner is being financed through a placement of 2.445 million Lamboo shares to “an existing institutional shareholder”, which presumably means Och-Ziff has given the deal the nod.

The merged entity will be listed on the Australian exchange and unnamed Asian exchange. (Expect the preferred choice to be Hong Kong, where Lamboo has recently opened a corporate office and has been looking at ways in which to increase its presence there. If not that, one would suspect Singapore as being high on the list.)

Lamboo CEO Richard Trevillion said the new group is aiming to become a key supplier to makers of lithium-ion batteries as well companies involved in renewable energy, other batteries, pebble bed technology for nuclear reactors and graphene markets.

Hengda is based in Hubei. It operates three graphite mines (Jinchang, Jingyin and Tanjiagou). It also owns a plant that makes spherical anodes for lithium-ion batteries and conducts technical research. Hengda has built three industrial parks: a graphite mine industrial park, a basic graphite materials industrial plant and a high-tech graphite industrial park.

During 2014 Hengda invested significantly in graphene production, ultra-thin graphite paper production and negative electrode material manufacturing. The company has 11 patents awarded and 26 under application.

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Lamboo brings to the table its flake exploration projects: the McIntosh deposit in Western Australia and three in South Korea. Last week Lamboo announced a scoping study for McIntosh that showed production costs of $483/tonne over a 21-year mine life.

Just three weeks ago the two companies signed a binding supply agreement whereby Lamboo would supply Hengda with 50,000 tonnes a year of flake graphite at a minimum of $2,000/tonne.

The release lists the benefits. For Lamboo, it means sharing a finished graphite product sale price rather than just selling the raw material, no need to build its own production and research plant, entry to the Chinese market with established customers. For Hengda, the perceived benefits include resource security for rapid growth (especially outside China at a time when many Chinese mines are being closed down), access to capital markets outside the tight money environment of China, listing on foreign exchanges and greater credibility for raising international capital (which presumably precludes the Asian stock exchange being one of the Chinese bourses). Hengda has been valued at $150 million.

There’s a delicious irony in Hengda now helping to revive the South Korean graphite industry. Between 1950 and 1990 South Korea was the largest graphite producer outside China, its output being about 70,000 tonnes a year of flake and amorphous graphite — most of it destined for Japan. But then the Chinese decided in the early 1990s to dump graphite on the world market to run down their stockpiles, a move which sent graphite prices plummeting. All South Korean producers (and all European ones, too) went out of business.

* The reference to “probable birth” is that the deal is subject to due diligence, so until that is completed nothing is certain.